Public companies have the advantage over private companies in access to capital to grow the business. But private companies can react more quickly to challenges and opportunities without going through exhaustive decision-making processes.
“One of the biggest advantages to staying private is in the decision-making ability,” said Kenny Bush, general counsel for the Yates Companies Inc., Philadelphia, one of the state’s largest private companies. “You can make quicker decisions without going through a bureaucracy or stockholders. The owners of private companies are accountable to themselves in how decisions work out. Another advantage with a private company is there is not nearly as much accountability and paperwork required as with a public company.”
Going public gives companies access to the capital market for needs such as equipment purchases and plant expansions. But the process of going public requires a lot of filing of paperwork because of the security regulations, said Ashby Foote, president, Vector Money Management Inc.
“The marketplace requires a lot more paperwork and regulatory hurdles that have to be met to satisfy all the security laws that have been written to try to protect investors,” Foote said. “Once you go public it is not just your business. There are other owners, so that requires a lot more public information. There are advantages to being private from the standpoint of not nearly as much disclosure that you have to make on finances.”
There are additional costs for being a public company. There is additional administrative overhead and personnel needed to meet regulatory requirements. Required mailings to stockholders can be expensive.
Foote said not many companies are going public these days because the stock market is very risk adverse.
“That makes it very difficult to go public,” Foote said. “You don’t have many going public because market conditions are not favorable.”
It is more economical to be a private company, says Dr. Walt Taylor, chair of the division of business, University of Southern Mississippi, Gulf Coast.
“A private company is less expensive simply because it does not have to have a lot of filing requirements, and fewer shareholders,” Taylor said. “Mailings are not as onerous. A private company is clearly more private with respect to information. Indeed, with some kinds of companies, that is the only way they can operate particularly if they deal a lot with the government. Suppose I’m working for a government agency that deals with a private company that looks for advances in weapons. You wouldn’t be able to do that kind of sensitive work as a public company.”
Private companies tend to be less likely to grant interviews with the press. Their business is kept largely confidential. Taylor said sometimes private companies don’t grant interviews out of concern about letting something accidentally slip during an interview.
“That is even a problem with public companies,” he said. “Let something slip and you might wreck a product’s chances.”
Taylor said in the 1980s a lot of public companies were taken private through a process called a leveraged buyout. That trend may have benefited the entire economy by making the companies a good deal more efficient.
“The reason why they got more efficient is they had to,” Taylor said. “Private companies have to get funding to finance their operations. The result of that was that some companies that went private were deeply in debt and had to manage their affairs in a very tight manner. They trimmed unprofitable divisions, areas and plants. As a result, these companies became very efficient. The benefits of that were felt throughout the economy.”
Then in the 1990s a lot of the companies went public again because the stock market was so high. Going public made managers and owners of many of those companies get rich very quickly during the stock market boom times of the 1990s. But Taylor thinks that might have undone a lot of the good done when the companies went private and became more efficient.
“I think it is possible they became less efficient,” Taylor said.
Few companies are now going public, and even venture capital in large part has dried up. Taylor believes some of the problems with the economy at present are a result of firms not investing their capital aggressively because of uncertainties.
“When the consumer goes into a hole and hides out, companies do the same,” Taylor said.
Besides keeping proprietary information out of the public domain, there are other advantages that private companies have in being able to have a level of secrecy and privacy in their business dealings that public companies don’t have.
“It is a great temptation nowadays, particularly in a litigious environment we have, to keep information private,” Taylor said.
Contact MBJ contributing writer Becky Gillette at firstname.lastname@example.org or (228) 872-3457.